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STEVE INSKEEP, host:

So think of this as another installment in our recession watch. If you're wondering if there's going to be a recession, you're not alone.

And David Wessel, economics editor of The Wall Street Journal, has been watching the latest indicators. David, good morning.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning.

INSKEEP: Okay. Friday, the Labor Department released some job numbers that look actually better than they did a month ago. Does that mean the trouble is past us?

Mr. WESSEL: No, it does not. We are absolutely going to have a recession - I just don't know when.

INSKEEP: Oh, you mean like 10 years from now or one year from now? That's what people might want to know - or one month from now, for that matter.

Mr. WESSEL: I think what we saw in the Labor Department report on Friday was how hard it is to predict where the economy is going right now because we're really in a circumstance that's unusual. We've never been through a period where housing prices have risen so far so fast and have started to come down.

We know that the Federal Reserve is on recession watch. They've already cut interest rates a half a percentage point. And if the economy continues to weaken, I expect they'll cut interest rates more.

But the problem with predicting recessions is this: When it's obvious you're in a recession, it's too late to do anything about it, but there's no way to know for sure if you're going to have one.

INSKEEP: Do we deserve one?

Mr. WESSEL: You know, there's a school of thought - it's called the Austrian school - that you need recessions every once in a while to cleanse the economy. I personally have no sympathy for that view. I think putting innocent people through the horror of losing their jobs and houses is ridiculous. And I don't think, more importantly, that the Federal Reserve or the U.S. government subscribes to that theory, that every once in a while you need to purge the excesses by forcing the economy through the meat grinder of recession.

INSKEEP: So then the other question is, is it possible then, by good economic management, to continually avoid one? We haven't had a really, really severe recession in quite some time, of course.

Mr. WESSEL: Well, you know, there's a pattern in recent years or recent decades of having fewer recessions, and the recessions we have have been milder than we had in the years immediately following World War II. And that leads to a kind of hubris that we've mastered the business cycle. So I actually don't think it's possible to steer the economy away from them because something always ends up surprising us. And when surprises hit, we may be unprepared for them.

INSKEEP: So let's look through the numbers that we have. The Labor Department says the job numbers don't look as bad as were expected. There's the real estate market, which still does look pretty bad. You do have companies taking billions of dollars in write-offs for bad loans. What other indicators are you looking at as you try to see where the economy is going?

Mr. WESSEL: Well, the stock market is up, and we - every recession since World War II has been associated with the decline in the stock market. Not every decline in the stock market, though, has been associated with a recession. That's one to watch. Oil prices are one to watch. If oil prices keep going up, it's hard to believe that won't have some breaking effect on the economy. And finally, this is - there's this ephemeral thing called confidence, which in the end seems to make the difference between painfully slow growth and recession. If all at once businessmen and consumers grow just a little bit more cautious, that can push the economy from painfully slow growth into a recession like the snap of a finger.

INSKEEP: How have oil prices not already pushed us into recession when it's $80 a barrel?

Mr. WESSEL: That's a great question, and it's actually a mystery to me. We know that the economy is more energy efficient. We know that there have been some good things offsetting the impact of higher oil prices, but it's very hard for me to understand why oil prices haven't had a more serious effect. One explanation is because the Federal Reserve hasn't panicked and shot at the economy to avoid oil-related inflation. In the past, the Fed reacted by tightening interest rates and pushing the economy into recession.

INSKEEP: Oh, they were worried that the high prices would cause inflation. They're hyper-worried about inflation, and so they raised interest rates and slowed down economy growth too much. That's what they did.

Mr. WESSEL: Correct.

INSKEEP: And so you had the high interest rates and the high oil prices, and it was just too much.

Mr. WESSEL: Exactly.

INSKEEP: This time they're cutting interest rates.

Mr. WESSEL: The current thinking among central, if you can just convince people that you're not going to have inflation, they can sit by while oil prices go up and it won't start an inflationary fire.

INSKEEP: David Wessel is economics editor for The Wall Street Journal. David, thanks very much.

Mr. WESSEL: You're welcome.

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